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Scotiabank Earnings Rise, but Will Its Latest Bet Pay Off?

The Canadian bank is implementing a huge share repurchase program.

In banking, financial institutions in Canada got a great reputation by avoiding much of the carnage from the financial crisis that crushed the industry in the U.S. in 2008. Bank of Nova Scotia (NYSE:BNS) was one of the big Canadian banks that fared reasonably well during the downturn, but more recently, the plunge in energy prices has raised concerns about the sustainability of the Canadian economy's expansion. Moreover, some have worried that the housing market in Canada is poised to see declines similar to what the U.S. suffered during the housing bust.

Coming into Friday morning's fiscal second-quarter financial report, Scotiabank investors expected relatively flat performance, and the bank actually managed to do a bit better than that. The big question, though, is whether a new share repurchase program will push the stock back upward.

Let's take a closer look at Scotiabank's latest quarter and what it says about Canada's banking industry.

A bit more green for ScotiabankScotiabank's results for the quarter were a far cry from the fast growth investors have gotten used to seeing from Canadian financials, but they nevertheless held their ground. Total revenue rose 3.7% to CA$5.94 billion, which was roughly in line with what investors had expected. Net income came in flat at CA$1.8 billion, with earnings of CA$1.42 per share climbing 2% and coming in slightly higher than the consensus estimate.

Looking more closely at the results, Scotiabank pointed to several factors that helped it hold its own. The Canadian Banking segment enjoyed the most rapid top-line growth, with Scotiabank pointing to increased net interest income margins in helping to drive its results higher. In terms of net income, though, the Global Banking and Markets division had the most impressive growth at 3%, compared to gains of less than 1% for Canadian Banking, and a roughly 1% decline for the International Banking segment.

The key reason for Global Banking's success was the fact that its exposure to the U.S. market left Scotiabank on the favorable side of currency movements, with the falling Canadian dollar making its U.S.-based profits worth more in local-currency terms.

Still, there were some reasons for concern in Scotiabank's results. Provisions for loan losses rose 20% from the year-ago quarter, as the bank cited interest in retail lending as driving the need for reserves. Nevertheless, Scotiabank's Tier 1 common-equity capital ratio climbed to 10.6%, due largely to the bank's efforts in generating capital internally.

CEO Brian Porter was pleased with the results. "Our strong capital position," Porter said, "allows us to make further investments to better serve our customers and grow our well-diversified businesses." Porter also pointed to the need to invest in technology to make the customer experience easier and more beneficial for the bank.

Source: Scotiabank.

Can Scotiabank stay healthy?One secret to Scotiabank's long-term strategy has been geographical diversification. The bank noted that its acquisition of a majority interest in the Chilean financial services business of Cencosud increased Scotiabank's broad international reach, with the potential to add more than two million customers in what many see as one of the healthiest economies in Latin America.

Scotiabank hasn't just developed a reputation as one of the strong banks in Canada; it has also acquired worldwide brand awareness, achieving top-10 status among wholesale and commercial banking brands across the globe.

Yet the big news from Scotiabank today came from its announcement of a plan to repurchase up to 24 million shares of its stock. The buyback, which would represent about 2% of Scotiabank's outstanding shares, reflects the bank's belief that "the purchase of its common shares at market prices may be an appropriate use of its funds to generate shareholder value, as well as for capital management purposes." The program will begin next week and go on for a year, with limitations on daily activity designed to prevent market disruptions while Scotiabank instead develops an automatic repurchase plan to keep its buybacks orderly.

Despite the big buyback, investors didn't react dramatically to Scotiabank's results, with the stock opening close to unchanged following the announcement. With continuing concerns about the Canadian economy, investors might be slow to give Scotiabank the benefit of the doubt.

In the long run, though, low share prices might let Scotiabank get the best deal possible for its buybacks, building shareholder value over time.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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